They say that the FAR allows it under 31205 36b3 which states the following: Rental cost of personal property leased from any division, subsidiary, or affiliate of the contractor under common control, that has an established practice of leasing the same or similar property to unaffiliated lessees shall be allowed in accordance with subparagraph B1 of this section.
Section B1 reads as follows:
b The following costs are allowable:
1 Rental costs under operating leases, to the extent that the rates are reasonable at the time of the lease decision, after consideration of
I Rental costs of comparable property, if any;
ii Market conditions in the area;
iii The type, life expectancy, condition, and value of the property leased;
iv Alternatives available; and
v Other provisions of the agreement.
Would you allow this consultant to claim the same rent per square foot that their unaffiliated lessees pay to them for renting their portion of the same building or would you continue to limit the rent to cost of ownership
The allowability of rental cost for real property under common control is limited to the costs of ownership.
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The Federal Acquisition Regulation (FAR) §31.205-36 (Rental costs) quoted in the question reads in pertinent part as follows (paragraph (b)(3)):
(b) The following costs are allowable:
(3) Charges in the nature of rent for property between any divisions, subsidiaries, or organizations under common control, to the extent that they do not exceed the normal costs of ownership, such as depreciation, taxes, insurance, facilities capital cost of money, and maintenance (excluding interest or other unallowable cost pursuant to Part 31), provided that no part of such costs shall duplicate any other allowed cost. Rental cost of personal property leased from any division, subsidiary, or affiliate of the contractor under common control, that has an established practice of leasing the same or similar property to unaffiliated lessee shall be allowed in accordance with paragraph (b)(1) of this subsection.
A careful reading of the above FAR selection makes clear that this subsection is addressing two different types of property – “real property” and “personal property.” In brief, “real property” is building and land while “personal property” are other types (non-building/land) of property. As the question posed here states, the rental at issue is of a portion of a building or “real property.”
Referring to the portion of § 31.205-36(b)(3) quoted above, the last sentence seems pertinent only to “personal property.” The Question Background states that it is this last sentence that the consultant relies upon as rationale for his/her position on allowability. This is misplaced and not persuasive because this last sentence is not applicable to the real property at hand.
Further, and again referring back to the portion of § 31.205-36(b)(3) quoted above, the first sentence is applicable to “real property” and (allowable amount could be less, but not more) the allowability of the rental costs of a portion of a building, such as that under common control here, to the “normal cost of ownership.”